From rooftop bashes and acquisition talks to staff clashes and layoffs, Hipstamatic’s founders and ex-employees describe the startup’s losing struggle to keep pace with Instagram, Facebook, and others in the white-hot photo-sharing space. In the first of three installments, Twitter comes calling, but Hipstamatic decides to go social on its own.

If Lucas Buick’s company Hipstamatic is on the verge of bankruptcy, you couldn’t tell by the dinner spread. It’s mid-September and we’re at the Isola restaurant in the Mondrian Soho, an expensive hotel-cum-lounge where you’re never quite sure you’re wearing the right style of Warby Parkers. Under the airy space’s glass ceiling and sparkling chandeliers, Buick and “director of fun” Mario Estrada knock back espresso martinis and old-fashioneds, while digging into tuna and pine nut crudos and fennel sausage pizza with herbed ricotta–delicious fare just begging to be photographed, filtered, and shared with friends.

“This is it. We’re clearly falling apart,” says Buick, laughing. “If this is the last supper, then I wish we had a bigger table.”

Despite a rough couple of weeks, the Hipstamatic cofounder and CEO is in good spirits. In late July, over lobsters and bottles of Prosecco, Buick told me he wanted Hipstamatic, a $1.99 photo app that takes analog-style photographs on your iPhone, to become the “Kodak for the digital era.” He envisioned a time when his company could be the industry leader for selling digital lenses, films, and flashes, as well as providing third-party camera and printing services.

But then just 16 days later, Buick laid off five of his employees, roughly half the company’s workforce, including its entire developer team and social media and office managers. The decision sparked a swath of bad press and ex-employee backlash, and led many to question the San Francisco-based startup’s viability. “Suddenly I was getting calls from friends asking, ‘Do you still have a job?'” Estrada recalls. “We’re going bankrupt? When did all this happen?”

Lucas Buick

“It got a little ugly,” admits Buick, who turns 30 this week. With a doughy face and ginger scruff, the former graphic designer carries a soft, seemingly happy-go-lucky demeanor, which juxtaposes his otherwise serious look: black G-Star jacket, black shirt, and black-framed glasses. “I didn’t even like coming to work,” he says. “When you’re the guy who built the company and you don’t even want to work there yourself, something just isn’t right.”

Hipstamatic’s journey over the past year has been tumultuous, to say the least. As Fast Company has learned from speaking to more than a dozen players involved, Hipstamatic has wrestled with ever-growing social competition, internal tensions, and a lack of product vision–not to mention juggling acquisition interest and worsening term sheets in a post-Facebook IPO world.

In late January of 2012, Twitter’s Jessica Verrilli got in touch with Buick regarding a potential acquisition.

But what the startup has most struggled with is remaining relevant in an unforgiving app market dominated by one of the hottest spaces in tech: photos. Photos are considered the killer app of any platform, web or mobile. They’re the driving force behind Facebook’s social success, and the reason for its blockbuster acquisition of mobile photo-sharing app Instagram, which recently surpassed Twitter in U.S. smartphone engagement. They’re why Marissa Mayer is said to be rethinking Flickr as she takes up the reins at Yahoo; why Google recently bought Snapseed; and why a slew of hot Internet startups from Tumblr to Pinterest to Camera+ have gained popularity. Even Apple introduced photo-stream sharing capabilities in its latest version of iOS.

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Hipstamatic was one of the first startups to crack the photo formula in the mobile space–then it watched similar services gain ground and eventually blaze by. The company’s experience proves that no startup can rest on its laurels in the age of the iPhone, when the time between innovation and disruption is ever shortening, and when IPOs and fast exits are valued over establishing long-term viable businesses. And perhaps most significantly, Hipstamatic proves that no modern startup can ignore the siren call of social, even if at its own peril.

Hipstamatic CEO Lucas Buick and CTO Ryan Dorshorst

In October 2010, Hipstamatic was booming. Its business model of selling in-app digital lenses and films, which effectively turned your iPhone into an old-school Polaroid camera, was attracting millions of users and millions of dollars in revenue, especially from its fast-growing community of shutterbugs in industries ranging from fashion to media. Soon, Apple would name Hipstamatic the app of the year; not long after, The New York Times’ Damon Winter would win a prestigious photography award for a series of Hipstamatic photos he took on assignment in Afghanistan.

So on Oct. 6, when an ex-Googler named Kevin Systrom launched a photo-sharing service called Instagram, there was no way of knowing that it would mark the beginning of the end of Hipstamatic’s honeymoon. Like Hipstamatic, the iPhone app enabled users to add vintage-era filters to photographs, but there were two key differences: Instagram was free and inherently social; Hipstamatic was not. If Hipstamatic was the camera utility used to enhance your photos, then Instagram was the network where you’d share those photos.

By March of 2011, when Hipstamatic hired its new designer, Laura Polkus, Instagram had already rocketed to 2.2 million users, and was growing by 130,000 users per week. But Polkus says the team largely ignored Instagram. “There wasn’t a whole lot of attention paid there,” says Polkus, who was later let go. “The conversation internally was, ‘Well, we’re completely different. They are a social network, and we are not. Who cares what’s going on with them? We’ll just continue to do what we do.’ But from the public’s perspective, that’s obviously not the way things were seen.”

“As Instagram started to build, everyone was like, ‘You guys should do this or that,'” recalls Buick, who was hesitant to enter the social game at first. “That’s not what we wanted to build.”

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One former employee recalls leaving for dinner after the company released a new pack of photo filters; by the time he had returned an hour later, the release had already generated high five-figure sales.

It was impossible for Buick to ignore the temptation of social, however. Despite Buick’s resistance toward changing Hipstamatic’s direction, the company embarked on a series of toe-in-the-water attempts at social. The first was Family Album, which launched in the summer of 2011, a product that enabled users to create and co-curate photo albums together. The other, D Series, was an app that aimed to capture a retro, disposable camera experience on the iPhone. Friends could purchase various packs of digital cameras together for 99 cents, and take and share up to 24 shots per roll–before having to buy another pack of cameras. “It was definitely a reaction to the social photography wave,” Polkus says. “The products were in response to people saying, ‘Okay, well we can take pictures, but how do other people see them without using Instagram?’”

“It was more or less a veiled attempt to take on Instagram, without being blatant about it,” says Stuart Norrie, then a UI designer at Hipstamatic.

Both products flopped. Family Album was incredibly confusing, especially compared to the simplicity of sharing on Instagram or Facebook. (Wrote one reviewer, “One of the biggest problems for Hipstamatic‘s Family Album is understanding what it is.”) When D Series went live in December of 2011, after months of work, the team was excited to introduce a new product before the Christmas break. “But on the day of the launch, we were there until midnight because there were so many complaints and tweaks needed,” recalls Polkus, who was monitoring the social feeds for the company at that time. “The thing I remember is all the people who were so enraged, so angry that they had to pay for these disposable cameras but were only getting a limited amount of pictures. They just kept calling us greedy. Everyone had this pit in their stomachs like, ‘Oh fuck.’”

Inside the Haus of Hipstamatic on Langton Street in SOMA, San Francisco

Whereas Hipstamatic’s user base has peaked at roughly 4 million active users, by January 2012, Instagram had blossomed to 15 million users, who were sharing an average of 60 photos per second. It was clear how much had changed in so little time: Apple gave its app-of-the-year prize to Instagram. By then, in fact, one of the top tags on Instagram was “#Hipstamatic,” indicating a large amount of users were snapping images on Hipstamatic but sharing them on Instagram.

The massive growth of Instagram’s platform only brought more attention to Hipstamatic from outside companies, which were looking to capitalize on the explosion of mobile photo sharing. A knowledgeable source says Facebook expressed “quite a bit” of interest in working with Hipstamatic. (Facebook declined to comment.) When Instagram originally launched, sources say Dave Morin reached out to Buick to work together on Path, his private mobile social network, to collaborate on products. (Path confirms the company did discuss partnering with Hipstamatic, but denies the discussions were related to Instagram’s launch.)

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And in late January of 2012, multiple sources confirm that Jessica Verrilli, who works in strategy and corporate development at Twitter, got in touch with Buick regarding a potential acquisition. The two met at Sightglass Coffee in SOMA, outside Hipstamatic’s office. One source says no terms were discussed then, while other sources tell Fast Company that Buick said he wasn’t interested in being acquired. (It wouldn’t be the last time Twitter reached out to express interest in Hipstamatic.) Both Hipstamatic and Twitter declined to comment on this matter.

At that time, the bootstrapped startup’s business was still growing at a fast clip, despite its lack of social capabilities. One former employee recalls leaving for dinner after the company released a new pack of photo filters; by the time he had returned an hour later, the release had already generated high five-figure sales, not an uncommon amount, says the source, who estimates the company has 100,000 core users who “will buy almost anything.” (Hipstamatic declined to comment on specific sales figures.)

But Buick was starting to consider a larger role for Hipstamatic in the social world. “It was right after the launch of D Series–Lucas seemed burnt out, but he was like, ‘I want to make another app,’” recalls Sam Soffes, a former iOS engineer at the company, who would later have a dustup with Buick. “We were sitting around and when I asked him what he wanted to make, he was like, ‘I don’t know. I want to kill Instagram.’”

Hipstamatic denies that Buick ever said he wanted to “kill Instagram.” Buick specifies, “We’ve never really tried to compete with Instagram.”

But one thing was clear: Hipstamatic could no longer ignore its social competitor. Stuart Norrie, the former designer, describes the changing mood inside the company during the early part of 2012. “I barely heard anything about social until the Instagram acquisition,” he recalls. “Then at Hipstamatic, it was all social, social, social, social.”